Updated from 12:03 p.m. EST Shares of Infosys ( INFY) rose Thursday after beating Wall Street's third-quarter earnings and revenue forecasts -- and the strong results could indicate another solid quarter for its offshore peers, analysts say. The stock was recently up 3.2%, tacking on $1.74 to $55.97, while changing hands at about double the usual volume. Dylan Cathers, an equity analyst with Standard & Poor's who previously had a sell on the shares due to margin pressures and a rich
valuation , bumped his rating to a buy. "Revenue is still advancing at a very healthy clip," Cathers said in an interview. He expects it to continue to grow at more than 40%, year-over-year, for at least the next few quarters. For the quarter, Infosys said revenue totaled $821 million, jumping 46.9% from $559 million in the same period last year. The Indian IT services firm posted a profit of $218 million, or 38 cents a share, for the third quarter, rising from $143 million, or 26 cents a share, in the same period a year ago. Analysts polled by Thomson First Call had expected a net income of 37 cents a share on sales of $797.3 million for the December quarter. Infosys also was able to keep margin pressure in check with price increases, benefits of scale and a better product mix, Cathers said. He said the company still has a high price-to-earnings ratio, but its PEG ratio (which compares its P/E to annual earnings growth) is in-line or slightly below its peers, leading him to re-evaluate his earlier rating.
Cathers has no ownership of the stock, and his firm does not do banking. Ashish Thadhani, an analyst with Gilford Securities, said the company did well in its telecom operations with 72% growth; its package implementation business at 61% growth; and its European business, which stepped up 58%. "The strength in these individual areas in the Infosys results bodes well for Wipro ( WIT)," he said, which has similar technology clients and projects. Offshore vendors Cognizant Technology Solutions ( CTSH), Wipro and Satyam Computer Service ( SAY) rode Infosys' coattails and added 2.9%, 4.4% and 4.7%, respectively, to their share prices. Thadhani has a buy on Infosys. His firm does not have a banking business with Infosys. Employee turnover rose, as is the trend with all of the Indian offshore firms, from 12.9% to 13.5% sequentially. Looking ahead to its fiscal fourth quarter, Infosys expects revenue of $859 million to $861 million and earnings of 40 cents a share. The forecast beats the consensus estimate for earnings by a penny. Sales projections were also higher than the $837.1 million analyst estimate. Still, sequential sales growth for the current quarter, at about 5%, "is a little more subdued that what we would have expected," Thadhani said. He attributed the lighter forecast to seasonality. "It's a departure from the last three quarters when revenue growth exceeded 10% on each occasion."
"The challenge is to keep revenue at above trend levels and maintain underlying profitability in the face of wages and currency pressures," he said.